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Hike They Shouldn’t

November 6, 2015 9:52 amNovember 6, 2015 9:52 am

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Does today’s good job report mean that the Fed will raise rates next month? Probably yes. Does it mean that the Fed should raise rates? Definitely not. The arguments against an early rate rise remain
compelling, and shouldn’t be abandoned based on one month’s data.

First of all, some perspective: while wage growth has picked up, it’s still well below pre crisis levels; core inflation is also still below the Fed’s target. And here’s the thing: there’s
very good reason to believe that the pre-crisis target was too low. The Fed used to think that 2 percent inflation was high enough to make the chances of hitting the zero lower bound on interest rates trivial; we
now know that this was utterly wrong. So the Fed should not be eager to raise rates until inflation and wage growth are at least at, and preferably above, where they were before the bottom fell out. And it certainly
shouldn’t be conveying the impression that 2 percent is not a target but a ceiling, which is exactly what it would do with a rate hike.

Beyond that, although related, is the asymmetry of risks. Yes, US job growth is OK right now. But the world economy as a whole is struggling, and we tend to import that weakness via a strong dollar; also, there are
plenty of other things that can go wrong. Maybe they won’t, and inflation accelerates a bit. If so, the Fed knows what to do. But if the economy weakens, the Fed doesn’t have adequate ammunition. So
uncertainty says wait.

I guess we’ll be talking about this at the IMF later today. I wish I thought we’d get traction.